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Bonang Mohale investigates the current economic situation in South Africa and offers various solutions which could put the economy back on track

In the midst of two wars in both Russia/Ukraine and Israel/Palestine, the world is in a precarious position! There is an expectation that geopolitical competition will increase countries’ and companies’ focus on building more resilient and diversified supply chains. Critical mineral supply chains will receive particular attention due to their growing importance for the green-energy transition, defence systems, and other high-tech applications, as well as their vulnerability to supply shocks. Competition between the US and China has put the need for more resilient and diversified supply chains in focus. Both countries rely on complex, international networks of suppliers, manufacturers, and distributors to provide the goods and services that make the two largest economies and the global economy function seamlessly.

The most important questions about global supply chains used to be about economics—what is the price of a given good and how efficient is the delivery? But today, some of the most important questions are about geopolitics—where are goods coming from, are they important for national security, and how can we know that the supply is secure and resilient to shocks? The current focus on critical minerals has been a long time in the making. In 1992, Deng Xiaoping, the Chinese leader responsible for launching the country’s economic reform and opening up, stated: “The Middle East has oil. Chinas has rare earth metals.” In the 20th century, the world experienced energy shocks due to a lack of supply chain resilience and diversification, the concentration of energy resources and geopolitical events like the Arab Oil Boycott of 1973 and the Iran Hostage Crisis. As countries transition from fossil fuels to green energy, allowing such vulnerabilities to persist in the 21st century would present unnecessary risks.

A coordinated, successful strategy to build more diverse and resilient critical mineral supply chains would need to take a comprehensive view of where the most pressing needs are today, where demand is heading, and include technological solutions to make the supply chain more resilient, efficient, and cost-effective. Such a strategy would require the public and private sectors to work together on new investments, new approaches to regulation, and new forms of international cooperation. The world remains optimistic that business and economic conditions will improve in 2024, with positive expectations about demand and revenue. Technology and digital transformation are still key areas of the business environment ripe with opportunity. Companies are looking to deploy technology to displace the need for added labour.

The year 2023 has been difficult for activity in sub-Saharan African economies. The inflationary shock following Russia’s war in Ukraine has prompted higher interest rates worldwide, which has meant slowing international demand, elevated spreads, and ongoing exchange rate pressures. As a result, growth in 2023 is expected to fall for the second year in a row to 3.3% from 4.0% last year. The region is expected to rebound next year, with growth increasing to 4.0% in 2024, picking up in four-fifths of the sub-Saharan Africa’s countries and with strong performances in non-resource intensive countries. Macroeconomic imbalances are also improving—inflation is falling for most of the region and public finances are gradually being put on a more sustainable footing. But the rebound is not guaranteed. A slowdown in reform efforts, a rise in political instability within the region or external downside risks (including from China slowing down) could undermine growth. Moreover, four risks are on the horizon which require determined policy action in the face of difficult tradeoffs, namely, inflation is still too high. It is in double digits in 14 countries. And it remains above target in most countries with explicit targets; the region continues to face significant exchange rate pressures; debt vulnerabilities are elevated. The funding squeeze is not over, as borrowing rates are still high and rolling over debt is a challenge. And half of the low-income countries in the region are at high risk or in debt distress and while the recovery is underway, economic divergences within the region are widening, in particular, per capita incomes in resource intensive economies remain subdued.

Against this background, the policy priorities are; addressing inflation—for countries where inflation is high but falling, a “pause” may be warranted, with rates held at existing elevated levels until inflation is firmly on the path to target. In countries with still rising inflation, further monetary tightening may be required until there are clear signs that inflation is cooling; managing exchange rate pressures—for pegged countries, monetary policy needs to be aligned with the anchor country to preserve external stability and prevent further losses of reserves. In countries with floating exchange rates, currencies should be allowed to adjust as much as possible, since efforts to resist fundamentals-based movements come at a significant cost. The adjustment should be accompanied by other policy measures like tighter monetary policy to keep inflation in check, targeted support for the poor, structural reforms to strengthen the export sector and fiscal consolidation where the fiscal deficit is adding to exchange rate pressures; managing debt obligations while creating space for development spending—for much of the region, fiscal policy must adapt to a tighter financing envelope and elevated debt vulnerabilities. This involves better mobilising domestic revenue, a strategic approach to spending, borrowing prudently, and anchoring fiscal policy through a credible medium-term framework. In the few countries where debt is unsustainable, debt restructuring may also be needed. With large development needs and limited fiscal space, most countries need greater financial support from donors and improving living standards and potential growth, particularly in resource intensive countries—boosting income per capita will require wide-ranging structural reforms, including investment in education, better natural resource management, improved business climate and digitalisation, and a commitment to trade integration.

South Africa currently has an official population of 60.02 million people and rapidly growing, of which 27.3 million (45%) and growing are on social security at an annual cost of R232 billion. Only 7.1 million (11.8%) out of 16.1 million employed are taxpayers! The economy remains in a low-growth trap as the average growth rate was below the population growth rate of 1.4%, effectively meaning that South Africans are getting poorer. In addition, average incomes have declined. GDP per capita has declined from a high of R80 191 (in constant 2015 prices) in 2013 to R74 907 in 2021. In the 2012-2019 period, using the measurement of gross fixed capital formation as a percentage of GDP, it averaged 19.6%, largely as a result of a decline in private investment, a slowdown in general government spending and reduced capital spending from SOE/Cs. For the 2018-2021 period, this declining trend continued with investment as a percentage of GDP averaging 14.7%. In 2021, private investment amounted to 9.9% of GDP and public- sector investment amounted to 4.1% of GDP. The slow investment growth can largely be attributed to declining investment by the private business due to a deteriorating economic outlook, policy uncertainty, and the slowdown in general government and SOE/Cs investment.

The economy is not growing and we have the world’s worst cash in transit heists, inequality, unemployment rate, SME failure rate, and GBVF rate; local government has collapsed in the vast majority of municipalities (87.1%) and infrastructure is not being maintained; depressing education outcomes and a defunct healthcare system; law and order, safety and security are out of control; loadshedding and water shedding are giving rise to fuel shedding, because electricity has a direct and substantial impact on costs and economic growth as the higher the electricity cost, the slower is economic growth and slow economic growth causes less job creation and therefore higher unemployment, lower standard of living and higher poverty levels—ominous and impending fiscal crisis due to excessive public sector wage bill and huge burden (18%) of servicing the inordinate debt; etc.

At the heart of these challenges of still continuing state capture, service delivery failures, preponderance of several mafias, lawlessness, inefficiencies at the country’s freight rail network and ports, porous borders, SoE/Cs collapses, economic ‘recession’, below investment grade ratings, FATF grey listing, anti-doping non-compliance, etc. lies a incapable state, corruption, government incompetence, and policy paralysis that risk turning Africa’s most industrialised nation into a failed state!

Moving forward, we should pause and reflect as to whether we have succeeded in sending a strategic message that simply says South Africa is open for business and we will, systemically, systematically, and chronologically with an approach address all the self-created and own goals that have plunged the country into the current existential crisis?

That we have demonstrated beyond any shadow of doubt that we are now better prepared to put our shoulders to the wheel and, together create a sustainable country in the short term whilst building a more resilient South Africa in the long term? A South Africa that is globally competitive; can better leverage the natural resources window of opportunity; expand both rural and urban economies and markets through Public Private Partnerships (PPPs); willing and able to focus on both productivity and growth; invest in growing our own timber and talent; grow more and larger black businesses and create more African champions; fully embrace digital across all areas of the economy; lead in implementing the Africa Continental Free Trade Agreement (AfCFTA); step up regional tourism, collaboration, flows, and investment and aggressively drive green business opportunities with pace, scale, size, scope, and urgency.

More critically, have we put in place the type of leadership required? Leadership that not only promises to uphold, protect, and respect the supremacy of the Constitution but demonstrates this in deeds; puts the interests of the country above party; is pro labour, pro business and pro poor; that is serious about reshaping the country; leans into volatility; actively seeks new and more opportunities; demonstrates a heightened sense of urgency; uses hindsight in order to gain insights that will better inform foresight to commitment to execution; ambidextrous; a proactive challenger and sparring partner; as well as the ability to assume a defensive posture.

Bonang Mohale is the Chancellor of the University of the Free State, Former President of Business Unity South Africa (BUSA), Professor of Practice in the Johannesburg Business School (JBS) in the College of Business and Economics, and Chairman of two listed entities.

By Editor